High-Grade Bond Spreads to Breach Pre-Crisis Gap, JPMorgan Says

Relative yields on U.S. investment- grade bonds are poised to tighten to the least since 2007 as the Federal Reserve’s program to buy up mortgage debt boosts demand for company obligations, according to JPMorgan Chase & Co. (JPM)

The extra yield investors demand to own corporate debentures instead of Treasuries will likely drop to 135 basis points, or 1.35 percentage points, by the end of the year, compared with 148 basis points Oct. 17, JPMorgan strategists led by Eric Beinstein wrote today in a report. The gauge hasn’t breached that level since July 2007, a year before the collapse of Lehman Brothers Holdings Inc., according to the analysts, whose forecast is lower than a previous year-end estimate of 150 basis points.

While a “frenzy” for high-grade debt that has pushed borrowing costs to record lows will probably slow considerably, the Fed’s open-ended mortgage purchases announced last month to support housing and boost employment “is a powerful force for lower spreads,” the strategists wrote. “Many investors hold corporate bonds as part of a fixed-income portfolio which also includes mortgage bonds, so the rally in mortgages has increased the relative attractiveness of corporate.”

The biggest near-term risk to a sustained rally is that policy makers won’t reach a compromise to raise the nation’s debt ceiling and avert the so-called fiscal cliff of $607 billion in federal spending cuts and tax increases scheduled to take effect in January, the analysts said in the report.

To contact the reporter on this story: Charles Mead in New York at cmead11@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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